Tagged: Guarantor

When you sign as a guarantor to a loan, you are taking responsibility to pay it back. It is difficult to move out of loan as a guarantor. You have to provide substitute guarantor for the loan.
Rajiv Raj- Founder & Director, Creditvidya.com | Retrieved on 24.04.2015 | Moneycontrol.com

Becoming a guarantor for a loan is a huge responsibility. It means you are providing a guarantee to the lender that you shall repay the debt of the borrower if he is unable to do so if such a situation may arise. But what if you decide, after some time, that you want to be relieved? This is a situation that is difficult to wriggle out of, but long story short, it may still be possible, subject to some tough conditions. Let’s take a closer look.

You have been magnanimous and become a guarantor of the loan that a friend or a close relative has taken, but after a while you decide that it has not been your wisest move and you want to opt out. If you don’t and the borrower becomes a defaulter on his loan you will be made equally liable for it. As a result, not only will the lender come after you, it will be a blotch on your Cibil report and bring down your Cibil score drastically. This, in turn means that if you do not pay up the outstanding, you will not get access to credit when you need it. Needless to say, that is a heavy price to pay.

When you decide to opt out, you will have to approach the lender directly with an application. Unfortunately the discretion is solely dependent on the lender whether or not it will let you go. The bad news is that, in the face of rising bad loans that is crippling the banking industry, the lender may not be willing to relieve you. This is because, it has probably tried all the ways and means to get the borrower to pay up his debt and failed. The good news is there are some circumstances under which you may be relieved.

An additional loan is granted without your consent
If you find that the borrower has taken an additional loan over the original amount that has been sanctioned without your consent, you may ask the bank to relieve you. However, you will still be liable to repay the outstanding on the original amount sanctioned.

A substitute guarantor for the loan
You may also approach the bank with an application for a release if there is a substitute guarantor for the loan. If the bank is really convinced about your reason why you are opting out and is convinced about the credentials of the substitute borrower, it may set you free. In such a case, your Cibil score remains intact as the loan is closed as far as you are concerned.

Get the borrower to pay back
This seems a little far fetched, as you would not have to bother about opting out if the borrower was making timely repayments and had intentions of paying up his entire debt within the stipulated time frame. However, you can indeed give this a shot. If you have been a guarantor for someone’s loan, its obvious that you know him very well. Try to make him see reason and help him out as much as you can to repay his debt. If it means seeking the help of other close relatives or friends, do so at the earliest.

Take legal action
If you have granted the bank a hold over some of your tangible assets when you were guaranteeing someone else’s loan, the bank will auction the same to recover the outstanding. However if these assets are in the real estate space and are either under mortgage or is an under construction property, you can fight your case saying that it has not been fully paid for. Since the bank tags the guarantor as a “willful defaulter” when the borrower does not pay up, you could also approach the judiciary saying that at the time that you had stepped in as a guarantor, there were no signs of the borrower defaulting. Just because the borrower has turned truant, does not mean that you are too.

If you manage to come out of the situation you must have a discharge letter from the bank stating that you are no longer liable for the outstanding amount as on the date when your guarantee has been revoked. In such cases you may actually get away with a unscathed Cibil score.

However, it may serve you well to know that in each of the circumstances mentioned above, the scales dip heavily towards the bank. When you sign up as a guarantor, you are giving the bank to invoke this guarantee at any point of time. As a result, the lender can sue you anytime.

There have been many cases where guarantors who were put in a tough spot, and had to pay up substantial chunks of money themselves to avoid to face legal action. Being a guarantor is as good as availing of the credit facility yourself so think about it carefully before you make any decisions. It’s tough to say no to people who may matter to you, but you cannot possibly put your financial future in jeopardy.

Adhil Shetty – CEO BankBazaar.com | Retrieved on 8th Apr 2014 | Moneycontrol.comFrom bank’s perspective the guarantor is treated as good as the borrower. In case the borrower does not pay, guarantor has to pay off the loan, failing which his credit score goes for a toss
Indranil is a project manager in an MNC earning about Rs 30 lakhs per annum. He is quite successful in his professional life and married with 2 kids. With a decent bank balance, own house (on loan), a mid-size car and kids studying at good schools, he has “arrived in life”.

His cousin’s son, Srikant, needs Rs 15 lakhs to finance his MBA education. He goes to Indranil to get one of the documents signed as guarantor. Indranil, the ever-loving uncle, signs the papers and hands it over. Things go well, until one day four years later, he receives a call from Srikant’s bank with a demand to pay up the loan since he is the one who guaranteed the loan. Indranil is in a fix. He has no idea what this means and why he should pay. The bank is persistent and Indranilis now contemplating taking the help of a lawyer.

This is a scary situation to be in. Having to pay for being a good Samaritan is not a position that is enviable.

Types of loan where guarantors are needed

Although almost every stream of banking activity has been regulated and standardized in India, nomination of guarantors is one area where banks do not have uniform guidelines. Individual banks have the right to decide upon the requirement of guarantor. Usually banks require one or two guarantors for higher amounts of loan. The amount for which guarantor is required can be from Rs 5 lakhs and upward. It also depends on the credit history and paying capacity of borrowers.Loans requiring guarantors include education loans, house loans, or any other loan where the amount borrowed is high.

The case of default by the borrower

Most of us forget that a guarantor is not only a witness or “someone” who attests the authenticity of the borrower but also guarantees that the person will pay up the loan. A guarantor in effect says that he is backing the borrower financially and guarantees that the loan will be paid back in case the borrower defaults on his payment. Naturally, the guarantor is liable in such a case.

Banks usually wait for a few months before they issue notice to the guarantor about the default by the borrower. From bank’s perspective, the guarantor is treated as good as the borrower. Hence, it is the responsibility of the guarantor to clear the loan. In case he or she doesn’t, the bank treats the guarantor as wilful defaulter. In the above case, if Indranil doesn’t pay up, he will be named wilful defaulter unless his lawyer and bank come up with a solution.

Impact on CIBIL score

Since banks assume no difference between guarantor and borrower in case of default, this impacts the guarantor’s CIBIL score as well as his credit score as reported by other agencies. Remember that when you guarantee a loan, this information is sent to CIBIL and other credit reporting agencies. While this doesn’t harm you at the outset, the issue arises when the borrower defaults.

This means it has negative impact on your CIBIL score if you and the original borrower defaults. Most guarantors do not realise this, though. Naturally, a low CIBIL score will hamper your ability to raise loan in future.

What to know before becoming a guarantor

Today, there is no credit information that is hidden from banks. Almost all banks can access your credit data from CIBIL irrespective of whether you have a relationship with the bank or not. With such increased transparency and availability of information, it is advisable not to become a guarantor unless you know the person well enough. You should assess the capability of the borrower to pay up. For example,if you are ready to become guarantor for education loan, check which college the borrower has selected for admission. It is easier for an IIM or IIT graduate to pay up the loan than someone from a lower ranked school.

Additionally, you should look at the liability of a guarantor in case of default by original borrower. You can get details on this from the bank concerned. However, if there is no information available in the documents or through the lending bank, rest assured that a guarantor is liable to pay up in case of default.

Finally, check the documents needed from you to become a guarantor. Provide only what is required and do not give too much information. For example, if you are becoming a guarantor for a loan of Rs 20 lakhs, don’t show an FD of 1 crore as proof. This may not harm you in anyway, but it is unnecessary to reveal this financial information.

Conclusion

Turning a guarantor may impact your capability to raise loan for yourself. For example, if you have loan of about Rs 30 lakhs for yourself and have become guarantor for another Rs 20 lakhs for someone else, this may have bearing on the amount of loan you can borrow further in future.

However, this is again an area where banks have discretionary power. They can frame their own rules on whether they should consider this fact while approving the loan. It would be advisable to speak with the bank concerned before becoming a guarantor for someone if you have plans for taking a loan yourself.

There are instances when your relatives or friends might request you to stand as a guarantor for a home, auto or business loan. This is a common ask because while sanctioning a high value loan banks often insist on having a family member or friend guarantee for security reasons. While it is okay to guarantee a loan of a trusted relative or friend, it is important to understand the implications of the responsibility, which you are accepting as a guarantor on this loan. Here is what you must know:You may have come across a situation when you have been requested to stand as a guarantor for a home, auto or business loan by a relative or a friend. This is because while sanctioning a high value loan, banks often insist on having a family member or friend guarantee the loan for security reasons. While it is okay to guarantee a loan of a trusted relative or friend, it is important to understand the implications of the responsibility which you are accepting as a guarantor on this loan. Here is what you must know:

· Guarantor is responsible for payment in case of default by the principal borrower
It is important to understand that by pledging as a guarantor on the loan, you are also legally responsible towards the timely repayment of the loan. A guarantor pledges to repay a loan on behalf of a third party who has taken the loan. Hence, he provides a guarantee to the lender, that he will honor the obligation, in case the principal borrower is unable to do so.

· Guarantor is responsible for the repayment in case of untimely demise of the principal borrower
In case of death of the principal borrower, the guarantor on the loan may be approached by the bank for repayment of the loan, depending upon the clauses of the loan agreement.

· The guarantor’s CIBIL report reflects the information on the loan
The information on the loan that has been guaranteed appears in the Accounts section of the guarantor’s CIBIL report. The ownership status of this loan account will be reflected as ‘Guarantor’. The CIBIL report will also show the month-on-month payment behavior of the principal borrower towards this loan. Any delinquencies and defaults will also get captured and reflected in the guarantor’s CIBIL report.

· The Guarantor’s CIBIL TransUnion score also gets impacted
In case of defaults and delinquencies by the principal borrower, the CIBIL TransUnion score of the guarantor will also get negatively impacted. Hence, it’s imperative that the guarantor on the loan should ensure that the borrower pays the EMIs regularly on the due date, month on month.

Having understood the broad implications of standing as a guarantor on a loan, here are some Dos and Don’ts you must keep in mind before guarantying a loan:

Read and understand the nature of the guarantee. A prospective guarantor must not sign a document that he has not read or sign a document which is in fact a blank form or a partially completed form. You may seek legal advice on the legal implications of the guarantee before signing.

Do not sign the guarantee if you are unclear or uncomfortable with any of the clauses.

Be cautious about giving a photocopy of your identity card or passport to anyone other than the financial institution.

Check your CIBIL report and CIBIL TransUnion Score before guarantying the loan in order to assess you credit standing prior to taking additional responsibility.

Ensure that you keep a track of the repayments and are aware of your liabilities in the event that variations are made to the terms and conditions of the loan.